By Russell Harley
Using cost analysis is an important tool in almost every kind of project. It helps determine if a project will improve a business’s profitability or not, so a great deal of effort goes into it during the beginning stages of a project. If an effort’s Return on Investment looks good, then the project moves forward and work begins.
The major issue with cost analysis is that a project’s future benefits are predicted by past and current behavior. Assumptions are being made: guesses about future trends, etc., are fed into the analysis. Contingency data is also added to try and reflect any unknowns that may occur as the project moves along. This is usually reflected by adding a 5 to 20 percent bump in overall cost.
All the above seems pretty reasonable, doesn’t it? This, of course, is why cost analysis is used so much. So why do so many projects get canceled due to cost, or go significantly over budget?
From my experience, there are two main reasons:
First, there’s the “human” factor. If a 10 percent contingency factor is added in and that causes the project to be marginal, then the first thing that happens is it’s adjusted down until the ROI improves. Additional efforts — like reducing the scope, extending the time frame across fiscal years and the like — are all tricks that can get the project approved by improving the ROI. Then there’s the “I want this project done and I don’t care what it costs” decision. All of these are based on human decisions that negatively impact the final estimated cost of the project.
The second reason is “stuff happens.” People leave, new priorities arise, technology that worked well in the lab/test environment fails in the field, assumptions prove faulty, etc. Unfortunately, in a lot of projects it’s too late to cancel the project by this point. This is especially true if the company’s leadership is involved.
I actually worked on a project where the initial analysis estimated a cost of around $1 million and a three-month schedule. The project actually ended up costing $2.3 million and took six months to complete. Why? Because the assumptions made at the beginning – which were based on lab work – didn’t hold up when we started executing. The company made the assumption that if it worked in the lab, it would work everywhere, which of course it did not.
So why wasn’t the project canceled? Since the CIO was involved, it had to be completed, regardless of time or cost. In addition, half the company had the new system involved, while the other half didn’t. So “failure is not an option” also came into play.
So the question is, why bother with all that time and effort creating a detailed cost analysis in the first place? Why not just decide the project must be done no matter what and proceed? Or, if a number is needed for budgeting, why not spend a few hours developing a ballpark cost and call it good? At least that way the time and effort involved in the cost analysis could be put to better use.
Either of the “human’ factor” or “stuff happens” is enough to render a cost analysis a waste of time. Both of these things impact many projects, which in turn makes their initial estimate seem even more pie in the sky than it was at the beginning. Given these factors, it’s a wonder why anyone would put the amount of effort into cost analysis that we now do. But since the Finance department controls the purse strings (and they love numbers), the cost analysis will continue to be an important part of the project management process, regardless of how inaccurate or useless it turns out to be.